A widely watched indicator of consumer confidence unexpectedly rose for the second month in a row in January, registering the highest reading since last July and hinting that the economy would continue to grow — albeit at a slower pace — in the first half of 2005.
The Conference Board, a New York-based business information group, reported Tuesday that its index of consumer confidence rose by 0.7 point to 103.4 in January, up from a revised 102.7 in December. Investors had been expecting the index to fall to 101.3.
Lynn Franco, director of the Conference Board’s research unit, said “consumers’ short-term outlook remains favorable and suggests the economy will continue to expand throughout the first half of the year.”
The group’s forward-looking expectations index declined in January, however, which economists viewed as a signal that economic growth would slow. The index fell from 100.7 to 98.4.
“For many economists, that’s probably the most important part of this report,” said Anthony Chan, senior economist at JPMorgan Fleming Asset Management in Columbus, Ohio. Chan, who described the overall rise in consumer confidence as a “pleasant surprise,” said he anticipates the U.S. economy to grow at a rate of 3.5 percent in 2005, down from an estimated 4 percent in 2004.
The indicator of consumer confidence is closely watched by economists because spending by individuals makes up about two-thirds of U.S. economic activity. The index is based on a monthly survey of some 5,000 U.S. households and compares results with its base year, 1985, when it stood at 100.
BMO Nesbitt Burns senior economist David Watt said he was surprised to see consumer confidence as strong as it was in January. “To see it improve like this is certainly a nice sign,” Watt said.
Watt said he was particularly encouraged by the Conference Board’s labor market reading, which to him signaled that employment may begin to grow at a faster pace and that “people aren’t going to be as worried about making big purchases.”
The survey found that consumers’ outlook for the next six months was less upbeat than the month before, however. Respondents saying they expected business conditions to improve declined to 21.1 percent from a revised 22.4 percent in December, while those saying they expected conditions to worsen rose to 8.0 percent from 7.7 percent.
Those saying they believed business conditions were good rose to 26.0 percent from 24.4 percent, while those saying they were bad rose to 18.2 percent from 17.8 percent.
The survey’s reading of the current labor market was more positive in January. The percentage of respondents saying jobs are plentiful rose to 20.7 percent from 19.4 percent. Those saying jobs were hard to get fell to 24.7 percent from 26.4 percent.
The outlook for jobs was slightly worse. Those saying they expected fewer jobs to become available in the coming months climbed to 15.5 percent from 15.3 percent. Those saying they expected more jobs to become available slipped to 16.3 percent from 16.4 percent.